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29 June 2007

Howrey Associate Pay Scale: What Merit Really Means

According to this story, Howrey, a 630-lawyer firm headquartered in DC, has ditched the nearly universal associate lockstep pay model in favor of a flexible approach that is purportedly linked to merit. Several blogs have debated whether this "bold move" is smart business or seeds of an eventual recruiting disaster. See WSJ Law Blog, Leiter, Moneylaw, Legal Ethics Blog, and Adam Smith. IMHO, they are all most are missing the bigger picture of what is really going on.

Howrey claims that "top performers" will be paid more, but (I think) that is just code for associates working in high-margin practice areas. These folks have a coveted skill set and are constantly being recruited on behalf of rival firms. In other words, the market is setting different price points for, say, 5th year labor & employment associates versus their 5th year private equity or specialty-litig peers. When partners with high-margin practices are losing associates, or associates in low-margin areas are getting raises they would never get in the lateral market, the "Partners with Power" are likely to lobby for--and get--an associate pay scale based on "merit".

Another datapoint corroborates this theory. Earlier this year, Dechert, a 700+ lawyer Philadelphia-based firm, moved to a bifurcated associate lockstep system: if you are in the favored Financial Services Group (FSG), you made up to $30K more than your non-FSG peers. Remarkably, Above the Law posted an internal Dechert email that detailed the FSG premium for each associate year. Certainly, Howrey's subjective "merit" system provides partners with better cover for meeting the market than Dechert's clumsy "caste system".

It is noteworthy that Howrey specializes in IP, antitrust, and global litigation--so associate salary wars with the big Wall Street firms are very hard to swallow. But the idea that Howrey is going to pay "low performers" less money is absurd. If you are a true low performer, your work dries up and you leave. But if you are superstar in a commodity practice area, your job is plenty safe; but expect to make less than your non-commodity peers. The laws of supply and demand are finally being brought to bear on Biglaw firms--that is what changing the age-old associate lockstep system, not some newfangled management theory.

The theoretical and empirical angle is after the jump.

The above analysis is based on my theory that the Big Law market is the
midst of a "separating equilibrium". In short, a few dozen elite firms
are pulling away from their BigLaw peers in the competition for
premium, price-insensitive work. Chief Legal Officers are under
increased pressure to balance legal fees against results; as a result,
longstanding client-to-firm loyalties that transcend price are drying
up. There is a lot of BigLaw commodity work out there, but it won't support
a lockstep system that ratchets upward from $160K. Moreover, in an eat-what-you-kill environment, partners doing premium work are unwilling to
cross-subsidize their labor & employment or insurance defense counterparts.

So what does the future look like? BigLaw will no longer be synonymous
with "large full service firms", which was the mantra throughout the '90s.
Successful financial services and labor & employment lawyers will
tend to migrate to different firms. If I am right, these patterns
should show up in our network and block-modeling analysis of lateral partner mobility from
2000 to 2006 (a study now under way with Biermann, Tuggle, Morriss,
Henderson & Galanter). Stay tuned.

Comments

Thanks. One thought experiment I've found useful is to imagine that there was an active public market in law firms. If that were true, what divisions (i.e., practice groups) would be spun off?

Presumably, they'd be spun off so that they could operate with lower cost (without downtown offices and high-priced associates). I assume that your new study will show that to some degree those areas are already being squeezed out of biglaw. At the same time, the profession's traditional guild approach (e.g., no public ownership) and the tradition of egalitarianism among partners will make that process slower than it would in a market setting.

Suppose this process continues. Will it reach down into the law schools? How will it affect law students? To some degree, the loan forgiveness programs alter the financial burden of law school for students headed into lower paying jobs. But if the firm market continues its differentiation, there will be pressure on law schools to do the same.

Bill, I think you're right on the money. Please forgive me for noting that I did indeed see the bigger picture about the reasons for discriminating in pay, including the use of higher pay for higher demand and hence higher margin pratice areas. (I wrote, "I say 'formal' because firms can use hefty bonuses to reward associates in high-demand areas and to compensate star associates.") My point was that it's not news that firms are discriminating in pay this way; it's news that they are now being more open about it. I, like you, expect both the discrimination and the public acknowledgment to acclerate.